Australia is a stock picker’s market

Might be time to take some profits off the table if you’re a short-term trader. The ASX 200 has rallied 13% since the market hit a low on 24 December.

Suddenly, there’s a lot of good news around.

Compare this to November last year. The news around China was grim. The Fed was on track to keep raising rates. The trade war had no obvious solution or clarity. The fear was palpable.

That’s what makes committing your money in the market so hard. When bad news abounds, it feels wrong.

Now it feels easier.

Why?

The Fed has backed off on interest rate hikes, for starters. Fed Chair Jerome Powell told the US Senate this week that there’s no rush to change this approach anytime soon, either.

That’s not all. The Fed is now likely to leave its portfolio much higher than the market previously anticipated. The market likes both of these moves.

That’s the first box we can tick…

The second is Trump toning down his rhetoric against China. Now the March deadline for the tariffs is not so firm, as he led us to believe. That relieves some of the pressure.

There’s a likely reason for this.

The US agricultural states in the Midwest are part of Trump’s key constituency. They’re hurting. US farmers are getting hammered from Chinese tariffs on their soybeans, and high debts and low prices across the wider industry.

That’s the second box.

And that brings us to China itself…

The dragon begins to rumble

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Some time ago, I said the Chinese central bank would be able to use its control over the banking system to juice up the Chinese economy.

We might be seeing the first inkling of that coming through. Bloomberg Economics says the Chinese economy is showing signs of life.

It’s appearing in Chinese stocks and commodity prices. Leverage is also creeping back after the crackdown of recent years.

All of these factors combined help explain why the US and Australian markets have rallied so hard so far this year. The fact that the news is public tells us it’s all built into the price.

Here in Australia, we have an extra dollop of positivity.

Rio Tinto [ASX:RIO] is so flush with cash that it’s going to pay out a special dividend of $4 billion.

I suggested buying BHP and Rio in a free report last year. It looked very wobbly there for a while, as the prospect of the trade war killed sentiment around global growth. But that particular idea has borne fruit in the last few months.

Some ideas simply take time to play out. You have to hold your nerve at times.

The core themes and ideas behind them remain on track. But market sentiment had knocked them down in one or another. I viewed this as a short-term blip. I didn’t expect them to stay down for long. And it looks like I’m being proved right…

That being said, I wouldn’t be massively surprised to see the wider marker take a short breather here. If that’s the case, you can use any dips to add to your long-term holdings across the bigger stocks.

That’s because any day, they can release an announcement that sends them soaring. The wider market is less of an influence. Small caps live and die on their own efforts mostly.

The best news is that there’s so much opportunity around for that to happen. Most people are surprised when they first see this.

Generally, the mainstream media play it safe and encourage everyone to buy a diversified fund with low fees.

It’s a perfect way to appear responsible and prudent while condemning anyone who listens to an entirely dull analysis of the stock market.

You can spend a long time waiting for something to happen. The Australian market is still below where it was 10 years ago.

Part of the reason for this is that the evidence for passive investing stems from studies based out of America.

Unfortunately, the Aussie market looks nothing like the US. It’s nowhere near as diversified or as dynamic.

Australia is a stock picker’s market. And the best place to look is down the smaller end. Small caps have more room to run than the bigger stocks. Australia is just not that big a market to grow into, generally speaking.

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